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Protect Board Members from Personal Liability

We all know that Board members volunteer their time, often putting in many hours per week for the betterment of their communities. While most homeowners are grateful for the work done by the members of their Board of Directors (and community managers!), there are times when the actions taken by the Board, or by individual Board members, are challenged. While this risk would deter many from volunteering their time, the laws in California provide some legal protections for Board members from personal liability. While this protection is not absolute, so long as a volunteer board member complies with the following checklist they should avoid personal liability for actions they take as a director

  • Act in good faith;
  • Act in a manner which the board member believes is in the best interests of the Association;
  • Act with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances (this includes, but is not limited to, consulting with the Association’s attorney, CPA, insurance and other experts, as needed);
  • Avoid acting in a manner that is willful, wanton, or grossly negligent;
  • Act within the scope of their duties as an officer or director of the Association;
  • The Association carries insurance which meets the minimum requirements set forth in California Civil Code 1365.7(a). These requirements include both liability insurance and directors and officers liability coverage.

When these requirements are met, the law provides a qualified immunity for volunteer officers and directors which shields them from personal liability, even if the amount of the damage is more than the amount of insurance coverage. In other words, a person attempting to file a civil action against a volunteer officer or director of an Association should have their claim dismissed by the courts. It is, of course, impossible to predict what a court will do in any one particular case, and many courts apply the law incorrectly, which is why we have Courts of Appeal.

Boards should also be aware that many insurance policies require that the insurance carrier be notified of potential claims as soon as the insured (the Association, or particular officers and directors, depending on the policy) has “notice” of the potential claim. This “notice” often occurs well before a lawsuit is filed. Therefore, it is important for the Board to consult with the Association’s attorney as soon as they suspect there may be any claim which might be made against the Association or any directors. The Association’s attorney should be able to guide the Board with respect to providing notice to insurance carriers in order to comply with an insurer’s “notice” requirements. Associations should also be encouraged to obtain fidelity coverage. A common mistake made by associations is to assume that their liability insurance also provides fidelity coverage. Frequently, this assumption is in error, and the coverage must be purchased separately.

Lastly, Board’s should also be made aware of the additional liability protection available for all Owners in an Association. California Civil Code Section 1365.9 protects the individual owners of the association from being sued for damages such as personal injury that occur in common areas of the association such as a neighborhood park. To receive this protection, the association must maintain liability coverage of at least $2,000,000 if there are 100 or fewer separate interests in the association, and $3,000,000 if the Association contains more than 100 separate interests.

Posted in Governance.